Many families are in the midst of preparing their teens to start college this fall. It's an exciting time for parents and teens alike as they visit universities and make financial plans for how all those college credits, books and late-night pizzas shared with friends will be paid for. The deadline for the Free Application for Federal Student Aid (FAFSA) application for Indiana schools is quickly approaching on March 10th.
With the many low-interest student loans now available, both public and private, college is an attainable goal for almost anyone. However, it's easy to get caught up in the thinking that student loans and credit cards, now aggressively marketed to even freshmen students, are free money. With a national student loan default rate conservatively estimated in excess of $20 billion dollars, I often hear stories from regretful students who borrowed beyond their means to repay or added to their debt with frivolous credit card spending.
Quick and easy credit is available to college students like never before. The National Federation of Credit Counselors (NFCC) reports that the percentage of students with credit cards rose from 67 percent in 1998 to 78 percent in 2000. By the time many students graduate with their undergraduate degrees they are already juggling minimum payments on several cards. Nearly one in four graduate students with credit card debt owe more than $3,000; nearly 10 percent of students owe more than $7,000.
Parents, among the many important talks you will have with your children before saying goodbye at the dorm entrance, please don't neglect talking about finances. The most important step in preventing your children from becoming a debt collection or bankruptcy statistic is to be proactive about managing educational debt.
The best advice you can give is to be careful about excessive borrowing, be realistic about the ability to repay and avoid piling credit card debt on top of student loans. Many experts advise that students keep educational debt payments within a modest 8% of their expected first-year income after graduation.
Educational debt even slightly over $20,000 will require a starting salary of nearly $43,500 per year; debt slightly over $30,000 will require a starting salary of nearly $60,000 per year to keep the debt ratio manageable and paid back within ten years. With the 2001-2002 median household income for Indiana residents slightly over $41,000 you can see how quickly the ability to repay what may feel like free money can quickly become a challenge after graduation.
Student loan defaults are reaching epidemic proportions nationwide. The long-term consequences may include lawsuits, wage garnishments, bad credit reports, ineligibility for federal jobs and perhaps most painful, the inability to purchase that first car or home. While you're packing up the computers, stereos and mini-fridges for that first year college experience, have a heart-to-heart with your kids about making responsible financial decisions now and warn them just how long they will be paying for that financed pizza.